Federer said he was sure the world number one would be untroubled by his recent illness as he bids to unite all four Grand Slams for the first time since 1969.
"He's been the one dominating the Slams," Federer said. "Had hardly any tough matches in the last three Slams. That makes him favourite. I don't have any problems not being favourite, really."
Defeat here would leave Federer without a Grand Slam title in his locker for the first time since 2003, when he began his world record run of 16 major titles with his maiden Wimbledon win.
Nadal is bidding to emulate Federer's idol Rod Laver by adding the Australian title to his French Open, Wimbledon and US Open crowns, which would put him on 10 Grand Slam wins.
But the 24-year-old Spaniard, who is trying to shake off a fever which saw him heavily beaten in the Qatar Open semis, denied he was favourite and said Federer was a better bet for the Australian title.
"If I play at my best level, I can have a chance to be in the second week, and there we will see what happens," Nadal said. "Every match will be really difficult, so I have to be ready for everything.
"But I for sure am feeling less favourite than (Federer) and not more favourite than (Novak) Djokovic, (Andy) Murray, (Robin) Soderling."
Nadal retired hurt from last year's Australian Open quarter-finals with a knee injury which kept him sidelined for nearly two months, before returning to capture three Grand Slam trophies in a run which Federer called "unbelievable".
"He's been playing incredible," Federer said. "(He had) an incredible run through the French (Open), Wimbledon, US Open. It was incredible to see.
"Then obviously it's hard to maintain. But he's going to be ready for this. I'll follow it very closely. If I get a chance, I hope I can stop him, obviously."
Four-time champion Federer is in the opposite half of the draw and cannot meet Nadal until the final. In 2009, the Swiss was left in tears when Nadal beat him in front of Laver and other greats in a classic, five-set final.
Nadal added that he was not fully recovered from an illness which struck him down during the Qatar Open, and described winning all four Grand Slam titles as "almost impossible".
"I think it's almost impossible. It's very, very difficult," he said.
"Tennis is a very competitive sport and there's not a lot of difference between players. So a lot of matches are decided in a few balls. So for that reason is very difficult to have one player winning everything."
Britain's Andy Murray, the world number five, said holding all four Grand Slams was one of sport's biggest achievements, regardless of whether they were all won in the same calendar year, as managed twice by Laver.
"To me, I think if you hold all four Grand Slams, it's one of the best achievements in sport. And I really hope he doesn't do it," Murray smiled.